A ‘Unicorn’ is a still private tech company whose market cap is estimated to exceed $1 billion. [1] Recently, there were at least 124 of them.[2] Beacon’s own, Good Technology showed up unicorn number 96 out of 120 on the Fortune Magazine unicorn list last August with a $1.15B estimated valuation.[3] So, it came as somewhat of a let down when Good made the announcement, buttressed by two valuation opinions and an extensive company analysis and mea culpa, that Blackberry was making a strategic acquisition of Good for the somewhat unmagical price of $425MM. My initial disappointment was soon tempered by the realization that, of the five groups of stockholders set to receive this compensation, Beacon fell into one whereby, should the sale be finalized, it will receive high payouts relative to certain other investor groups.

Beacon acquired its ‘Good’ stock in four investment rounds from 2009 through 2012 into Sumooh, Inc., a Massachusetts storage software startup founded by Puneesh Chaudhry, a former EMC employee. Sumooh, which later changed its name to Copiun, addressed the ‘pain point’ that, with e-mail and the influx of large numbers of remotely operated computers into company networks—laptops, Blackberries and the like (remember when ‘Blackberry’ was virtually synonymous with ‘smartphone?’)—much duplicative company data were being stored pointlessly: E-mail ‘strings’ grew fractally through the inclusion of copies of all preceding e-mails, and company documents repeated bulky logo image files endlessly, requiring a huge amounts of extra storage. Sumooh/Copiun pitched the attractively simple proposition that it had already developed, and would sell a service to companies on an enterprise basis, where duplicative files would be stored just once, saving hardware and networking costs.

Although Copiun enjoyed initial success with a few large enterprise sales, the startup marketplace apparently deemed their service more attractive if sold on an OEM basis. Good Technology, which had been in existence since 1996 in several guises, determined to add Copiun’s technology to its mobile device management systems. So, in September 2012 Good bought our little company using a new series of B-2 preferred stock at a valuation for Copiun of $28M, and for Good of $487M—so Good was not yet a unicorn. This represented an average, unrealized IRR, for all of the four Copiun rounds in which Beacon participated, of 4.32X.

Using a modest conversion ratio to even things up for the relative valuations, Good gave Copiun’s preferred stockholders a series of preferred shares with a price per share, and matching liquidation preference of $4.92. Good must have been on a roll then because by inference from the preference size accorded in the preceding round, Good’s prior investors apparently had valued Good at nearly a five times lower pre-money amount.

As it turned out, the price of Good’s sale to Blackberry will fall below Good’s September 2012 valuation when they acquired Copiun. But here’s the thing: Liquidation preferences can be very protective of serious investors putting cash into startup companies in a down round. Furthermore, the issuance of new preferred stock in an acquisition locks in the valuation of the acquisition for the company being acquired. So, apart from the fact that it never really was a tech unicorn, Good’s acquisition of Copiun, as it happened, locked in our own valuation to a certain extent, derisking our investment into Copiun somewhat—even as Beacon acquired a whole new set of risks in Good.

Given that the sale to Blackberry will fall below our liquidation preference net net, Beacon Angels can cry all the way to the bank. If the sale actually goes through and the 15% escrow amount is released in full two years from closing, Beacon will realize a return on its investment of over 3.7X—not bad for an investment in a company whose initial revenues were halting, problematic, and dependent upon a small number of large customers.

-William F. Swiggart, Esq., Manager, Beacon Angels

[1] Aileen Lee, of Cowboy Ventures, popularized the term to mean a tech companies, public and private, started since 2003 via a comprehensive Techcrunch article in November 2013. She listed 37 of them, in existence at the time. By her July 2015 follow up, the list had grown to 84, mostly through valuation increases.